Despite solid revenue growth, earnings per share dropped 19% from the year-ago quarter due to rising fuel costs and increased maintenance expenses. Total revenue climbed 22.4% year over year to a record $1.15 billion and outpaced the Zacks Consensus Estimate of $1.13 billion.

Airline traffic, measured in revenue passenger miles, increased 7.9% year over year on an 8.7% growth in capacity. Load factor (percentage of seats filled with passengers) fell 50 basis points year over year to 81.5%.

Yield per passenger mile leaped 13.9% compared with the year-ago quarter. On an annualized basis, improvements of 13.2% in passenger revenue per available seat mile and 12.9% in operating revenue per available seat mile were recorded in the quarter.

Total operating expenses increased 26% year over year to $1.1 billion, primarily due to higher fuel (up 57.6%) and maintenance (up 28.7%) expenses. JetBlue’s operating unit cost or cost per available seat mile (NASDAQ:CASM) grew 16% year over year. Excluding fuel, CASM inched up 1.7% from the year-ago quarter.

Operating income declined 9.6% from the year-ago quarter to $86 million. Operating margin contracted 270 bps year over year to 7.5%.

Liquidity

JetBlue ended the quarter with unrestricted cash and short-term investments of $1.2 billion.

Guidance

For the third quarter, the company expects CASM to increase 13–15% and CASM, excluding fuel, to decrease 2–4% from the year-ago quarter. Capacity is expected to increase 9–11% year over year.

For fiscal 2011, CASM and CASM excluding fuel, are expected to increase 14–16% and 0–2%, respectively year over year. Capacity is expected to increase 6–8% year over year.

JetBlue expects an average fuel price per gallon, including hedges and fuel taxes, of $3.33 for the third quarter and $3.24 for 2011.

Our Analysis

We believe JetBlue is poised to grow even in a rising fuel price environment. With a low cost structure and the youngest fleet among major U.S. airlines such as Delta Air Lines (DAL), United Continental Holdings Inc. (UAL) and Southwest Airlines Co. (LUV), JetBlue is combating rising fuel prices with increased fares and fuel-hedging strategies.

The company has hedged approximately 48% of projected fuel requirements for third quarter 2011 and 43% for fiscal 2011, with a combination of crude call options and collars, jet fuel swaps and heating oil collars.

In addition, JetBlue has one of the strongest liquidity positions in the U.S. airline industry with minimal debt maturities. However, fuel price volatility, higher dependence on the New York metropolitan market, competitive pressures and automated technology keep us on the sidelines.

We are currently maintaining our long-term Neutral recommendation on JetBlue. For the short term, the stock retains a Zacks #3 (Hold) Rank.